Assessing Lagarde's Rhetoric: Eurozone Inflation and Market Expectations for ECB Policy
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EUR: Lagarde's rhetoric facing a test
The main highlight of the day in the eurozone is the testimony by European Central Bank President Christine Lagarde before the Committee on Economic and Monetary Affairs of the European Parliament. The quite consistent hawkish rhetoric we have heard from Lagarde and the majority of ECB speakers since the latest ECB meeting will now need to face the evidence that eurozone inflation is declining more rapidly than expected.
It does not seem highly likely that Lagarde will signal a U-turn in her communication only 10 days before the ECB meeting, and markets are still pricing in two more hikes before the peak, meaning that the bar for a dovish surprise is still set quite low. Later in the day, the hawkish message should be reinforced by a speech from Bundesbank Governor Joachim Nagel.
Our point in the USD section about a potential halt in the rebound in USD short-term swap rates means that the two-year EUR-USD swap rate gap may also find some respite after having collapsed from -62bp to -116bp in the past four weeks. We feel that EUR/USD could find some support around 1.0650/1.0700 and even stage a rebound back to 1.0800/1.0850 this week.
